The Digital Camera Market: An Ugly Picture

In 2011, 27% of pictures taken by Americans were snapped with smartphones — a solid jump from the 17% the year before. Since then, it’s pretty safe to assume that number has risen even further.

If that wasn’t enough of a cause for concern for digital camera manufacturers, a recently patented Google (NASDAQ:GOOG[1]) feature could make things worse. Earlier this week, the tech giant was granted a patent for multi-flash LED technology[2] that puts a ring of lights around a smartphone’s camera to improve the quality of picture.

If this newest technology works, smartphone and tablet cameras could become even more competitive … and steal even more picture-takers. That’s bad news for some players in the digital camera arena — specifically, companies focused on point-and-shoot compact digital cameras[3].

Companies In Danger

One of the biggest losers in the compact digital camera business this year could be Canon (NYSE:CAJ[4]). The company sold 2% fewer compact digital cameras in 2012 and expects a 7% reduction in volume in 2013. Although it expects its interchangeable lens business to increase by 14% in 2013, the sheer volume of its compact business means its digital camera business overall will actually decline by 1%.

Plus, its most recent quarterly report showed that profit margins for the compact digital business continue to shrink. The main saving grave for Canon shareholders so far has been the weakening yen and the fact that it does 80% of its business overseas. Those factors mean Canon should still grow earnings by 14% in 2013, taking the sting out of its evaporating compact digital camera business.

The company likely to be hit the hardest from a disappearing compact market, though, is Japan’s Olympus (PINK:OCPNY[5]) — the company guilty of accounting fraud a decade back. In its fourth-quarter earnings forecast, Olympus indicated that the digital camera unit will lose $87 million in 2012 — a far cry from the original $11 million projection — thanks almost exclusively to the company’s compact business.

On the bright side, Olympus expects that its earlier net income forecast of $77 million was about $10 million shy.

Companies That Are Safe

The only company that doesn’t seem to be getting killed by the smartphone’s explosive growth is Nikon (PINK:NINOY[6]), whose Nikon 1 and COOLPIX compact digital cameras managed to take market share in the first half of its fiscal year even as the compact market is expected to ship 80 million less units this year.

Of course, not all cameras can be replaced by smartphones, either. An Apple (NASDAQ:APPL[7]) iPhone, for example, is a common replacement for compact digital cameras because most users have it with them at all times and it takes at least a good enough photo … but serious photographers and old-timers will always choose a digital single-lens reflect (DSLR) camera over a smartphone. In fact, the DSLR market is expected to grow 50% over between 2012 and 2015.

Last June, J.D. Power and Associates released its 2012 DSLR Camera Online Buyer Report, highlighting the manufacturers with the highest customer satisfaction for online buyers[8]. The ratings included five categories: ease of operation, picture quality, durability, variety of features and shutter speed. The winner was Pentax, which was acquired by Ricoh (PINK:RICOY[9]) in July 2011 for $124 million. Before the move, Ricoh didn’t have a DSLR camera. The acquisition of such a popular high-quality camera could be Ricoh’s saving grace.

Companies for the Future

Some companies are working to lure in both sides of the camera market — those loyal to DSLR cameras and those preferring the convenience of a smartphone. The mirrorless digital camera with an interchangeable lens is seemingly the perfect compromise.

Sony (NYSE:SNE[10]) happens to be one of the leaders in this field along with Olympus and Panasonic (NYSE:PC[11]). Interestingly, all three companies have innovated from the ground up at a time when they could least afford to financially.

At the end of the day, the patent by Google should remind camera companies that they have to come with a product that does more than take pictures. The success of digital cameras lies in innovation … and digital compact cameras are increasingly looking like a thing of the past.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.